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The Biggest Myths About SBA Loans Are…

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In my time as a workout expert, there have been several misconceptions that I have consistently had to address.  And these aren’t minor misunderstandings.  These are issues that, in my opinion, are pretty important to know.

Myth #1: The SBA Guarantee means that if you can’t repay the loan, the SBA will pay off the bank on your behalf.

I’ve said it before, I’ll say it again.  The SBA guarantee is ONLY FOR THE BANK.  If you default on the loan, the SBA will reimburse the bank (subject to SBA satisfactory review of the file), but you will still be very much responsible

Myth #2: The SBA makes 7a loans directly to small business owners.

Myth #3: You need to be declined for a traditional bank loan before you can apply for an SBA loan.

Myth #4:

Jason Milleisen can answer your questions about applying and being approved for an SBA loan.  Feel free to call (toll free 1-877-436-4533) or email me (jason@jasontees.com).   If you retain me to help you with your financing needs, I’ll give you a rebate after your loan closes equal to 10% of my commission, up to $500.

Annoying Questions Your Bank Might Ask When You Apply For An SBA Loan

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The application process for an SBA loan is similar to applying for a residential mortgage in that the bank will sift through your financial documents, and try to determine if you are a good credit risk.  Sometimes they ask legit questions.  For example, if you are buying a subway franchise, they will want to know about your experience in the industry.  Have you ever worked at, or run a subway?  Were you just an employee or a manager? They want to get a feel for whether you are truly a business owner, or if you are an employee who is essentially just trying to buy themselves a job.  In case you are wondering, yeah, that happens a lot.  Just because someone has worked at a Five Guys doesn’t mean they are qualified to own one.  Managers often don’t have to deal with all the aspects of running a business than an owner does, such as managing cash flow, hiring/firing employees, etc.

Other the other hand, sometimes you get some questions that are, and these are technical banking terms, stupid and irrelevant.  Credit underwriters are sometimes younger employees, perhaps only a few years out of college.  Many of these underwriters simply lack the experience to know what questions to ask, so they ask questions that really have no relevance.  I used to tell new underwriters that if the answer to their question wasn’t going to change the loan decision, it probably wasn’t worth asking.  For example, when performing their financial statement analysis, underwriters will compared 2 or 3 different years of financial statements to identify trends.  If the borrower had 30% less revenue in 2017 than they did in 2016, that’s worth asking about.  On the other hand, asking why revenue fell by 1% is simply a dumb question to question why the happened.  If the revenues amounted to $500,000 per year, 1% if immaterial.  If you apply for an SBA loan, there is a decent chance that you will get at least one question that makes you roll your eyes.  Don’t fret, it’s all part of the process.

While it can be tortuous to endure pointless questions, it’s important to remain cordial and responsive.  The people working at the bank are juggling lots of files, and I can tell you that as a former underwriter, I would always avoid having to deal with the “difficult” borrower.  It doesn’t mean I’d sabotage the file or anything that sinister, but by serving my nice and responsive borrowers first, it would conceivably cause the jerk’s loan to but put on the back burner for a bit.  Having a jerk as a borrower also made me hyper-focuses on my analysis, almost looking for a reason to turn them down.  He’s making my life a nightmare, so human nature dictates that I’m going to approach anything that has to do with the jerk with negative emotions.  Will it turn a definite yes into a no?  Probably not.  Could it be the difference between an approval and a decline on a loan that is borderline?  Definitely.  Don’t forget, when evaluating a loan application, the character of the person behind the business is part of the equation.  If you can’t treat your banker like a human being, what does that say about how you conduct business in general?

Jason Milleisen can answer your questions about applying and being approved for an SBA loan.  Feel free to call (toll free 1-877-436-4533) or email me (jason@jasontees.com).   If you retain me to help you with your financing needs, I’ll give you a rebate after your loan closes equal to 10% of my commission, up to $500.

Top 3 Mistakes Borrowers Make When Applying For an SBA 7a Loans

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Wouldn’t it be nice if the moment you needed an SBA loan to buy a business, refinance some debt, or purchase a building, you could snap your fingers and have your funds magically appear in your bank account?  Unfortunately, like anything worthwhile in life, it’s not that simple.  While obtaining SBA financing for your business isn’t completely painless, there are certain mistakes that borrowers often make when going through the loan application process that will often slow down the process, result in your SBA loan application being declined, or leave you regretting ever taking the loan in the first place.

1) Incomplete or Sloppy Paperwork – This is the most common (and most avoidable!) problem I see.  Business owners don’t think of the application of an audition, but it kind of is.  Put yourself in the lenders shoes.  If you, the borrower, can’t manage to follow the 1st step of the SBA loan process, how much confidence do you think they’ll have in your ability to run a business.  That aside, if you give them paperwork in bits and pieces, I can tell you from experience that it can delay the entire process.  A lot of information needs to be timely (like less than 30 or 60 days old), so if you take a month to submit the paperwork, parts of it might be stale by the time you submit it.

2) Not Understanding Loan Terms – Taking an SBA loan entails borrowing hundreds of thousands, or even millions, of dollars.  It’s shocking to me how many times over the years that people said they didn’t really understand the loan documents they were signing.  Don’t get me wrong, you are probably not going to understand every single word in the SBA loan documents, but in most cases, that’s why you have the option to have an attorney review the closing documents.

I get it.  Not everyone likes numbers and finance.  But when you are borrowing that much money, you NEED to know this stuff.  You are the CEO.  You need to know if you are pledging your home, who is guaranteeing the loan (and exactly that that means), what the rates is (and how the rate can change), and why type of loan you are taking (SBA 7a, 504, conventional bank loan.  For most people, an SBA loan is the single largest obligation they will ever undertake.  To not fully understand the details of that transaction can have disastrous consequences down the road.

3) Taking On Debt Right Before or During the Application Process.

As you are likely aware, good personal credit is usually a pre-requisite for most loans, and SBA loans are no exception.  So it should go without saying, being financially diligent right before a loan application is submitted is a must.  For some reason, some people simply don’t connect the dots on that idea.  Before you apply, it’s a really good idea to get a look at your credit report so you know your score, and also know what’s on it.  In many cases, loans will be declined not because of bad personal credit, but because a borrower simply has too much debt.  Lenders are required to perform a “global” cash flow analysis.  This means is they need to make sure that you will be able to afford both your business and personal obligations.  Some borrowers assume that if a business is profitable, then the loan should be approved, not understanding the concept of “global” cash flow.  If, before you apply for your 7a loan, you go out an buy a new house or a new car, the bank will want to ensure that the “draw” you take from the business is enough to pay for all those new toys.  How upset would you be if your loan were turned down because you had to have the BMW?

Jason Milleisen can answer your questions about applying and being approved for an SBA loan.  Feel free to call (toll free 1-877-436-4533) or email me (jason@jasontees.com).   If you retain me to help you with your financing needs, I’ll give you a rebate after your loan closes equal to 10% of my commission, up to $500.

Can I Get An SBA Loan For A Car Wash Or Gas Station?

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If you are looking for purchase a car wash or gas station, you probably know that some lenders won’t touch that kind of deal with a 10 foot pole.  Fear not, readers!  While some lenders won’t, I have a relationship with a lender that is looking for finance both Car Washes and Gas Stations.

Why don’t some lenders finance gas stations or car washes?

When I was an underwriter, the bank I worked for did offer loans for gas stations and car washes once upon a time.  And then some borrowers stopped making payments.  And then the bank had to start foreclosure proceedings.  Once they took possession of the property, they tried to sell.  As part of most commercial real estate deal that involve properties like that, they perform an environmental assessment to ensure that the land on which the buildings sit is not contaminated.  Unfortunately, gas stations and car washes both can contaminate the ground.  Without getting too technical, when chemicals get into the ground, it ain’t good.

The problem with owning a contaminated property, or in the banks case, taking possession of a contaminated property, is that once you own it and find out that it’s contaminated, you get to be in charge of cleaning it up!  Fun, right?  Actually, not so much.  The reason it’s not so fun is this:  it can take years to remediate a contaminated property, and it cost cost hundreds of thousands of dollars to do so.  So as you can imagine, once that happens to a lender a few times, they can understandably get a little gun shy.

There also another reason why some lenders don’t want to finance specialty use properties like gas stations or car washes, and it has nothing to do with contamination.  The reason lenders don’t like them is that the are specialty use properties.  The problem with a specialty use property is that they are once dimensional in terms of how they can be used.  A car wash has very specific building, machinery, and equipment, none of which can be used for much else.  Compare that with a strip mall, or commercial building.  These property types can host all sorts of different businesses, which means there are many more potential buyers out there.  When you are trying to sell a gas station, you are limited to buyers who are looking to buy a gas station.

While the above might seem like a doom and gloom scenario, the good news is that there ARE lenders who will still lend to there business types in spite of potential issues that might arise.

Jason Milleisen can answer your questions about applying and being approved for an SBA loan.  Feel free to call (toll free 1-877-436-4533) or email me (jason@jasontees.com).   If you retain me to help you with your financing needs, I’ll give you a rebate after your loan closes equal to 10% of my commission, up to $500.

What Industries Does The SBA Lend To?

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Ok, so the title of this article is a little misleading.  The SBA doesn’t really say what industries they WILL lend to.  Rather, they tell us which industries they WILL NOT lend to.  The SBA has determined that some business types simply don’t fit the mission of the SBA lending programs, and delineated exceptions where appropriate.  So here we go:

The SBA will not lend to non-profits.  The SBA program is intended to create jobs and economic growth, so non-profits simply don’t fit that mission.

The SBA will not lend to businesses who are engaged in lending.  This includes banks, life insurance companies, finance companies, factoring companies, investment companies, bail bond companies.  There are certain exceptions to these restrictions, since some business are quasi-lenders, such as pawn shops who offer loans but also sell merchandise.  Here are the exceptions:

– Pawn shops where 50% of prior year’s revenue was from merchandise sales rather than loan interest.

– A business that provides financing in the ordinary course of business, as long as less than 50% of revenue is from financing.

– Mortgage companies that sell loans within 14 days of closing.  Portfolio lenders (ie lenders who make and hold loans)

– Check cashing business as long as 50% or more comes from check cashing.

– Financial advisors who work on a fee basis, as long as they do not use loan proceeds to invest in their own portfolio of investments.  (Note: I see a pretty obvious loophole here, since money is fungible.  By this I mean a financial advisor could use loan proceeds to pay rent, salaries, and other operating costs, which would free up cash to invest in their own portfolio of investments.  Technically, this approach would comply with the SBA guideline for financial advisors.)

The SBA will not lend to passive businesses.  This includes owners who do not actively use or occupy more than 50% of a property, real estate developers engaging in subdividing property into lots, businesses that primarily own real estate for the purpose of leasing it out (shopping centers, salon suites), and apartment buildings.

Exceptions to the passive business rules include hotels, motels, marinas, campgrounds provided that 50% of revenue comes from “transients”  who stay 30 days or less.  (Note: Clearly, they think that if your customers stay less than 30 days, you are actually running a business rather than just being a landlord.)  Other exceptions include nursing homes, assisted living facilities, businesses engaged in leasing equipment, barber shops, nail salons and hair salons.

The SBA will not lend to Life Insurance Companies (life insurance agents are allowed, subject to certain conditions).

The SBA will not lend to businesses that are located outside the United States.

The SBA will not lend to pyramid schemes or multilevel marketing businesses.

The SBA will not lend to most legal gambling businesses.

The SBA will not lend to businesses that restrict patronage, such as a women’s only gym (Note: you can market to women, but must allow men to join if they wish).

The SBA will not lend to government owned businesses, businesses that promote religion, or businesses that engage in SBA loan packaging.

The SBA will not lend to a business if an associate if incarcerated, on probation, on parole, or currently subject to an indictment or other means by which formal criminal charges are brought. (Note: there is an appeals process where a person can ask the SBA to reconsider).

The SBA won’t lend to businesses that offer “prurient” sexual material.  Sorry porn stars, you’ll have to financing your next project elsewhere!

The SBA won’t lend to businesses that engage in activities that are speculative (commodities training, day trading etc), political lobbying activities, businesses on which the government has previously lost money, businesses owned by a non-US citizen (business must be at least 51% owned by a US citizen.

Overall, many of the items on the prohibited list make sense.  The whole idea is to help American small business owners that want to run traditional businesses.  The SBA is not interested in financing businesses that are controversial (pornography), speculative (day trading), have questionable reputations (multilevel marketing), or are primarily passive investments (apartment buildings).  While the list seems long, there are tons a businesses out there that the SBA will finance.

Jason Milleisen can answer your questions about applying and being approved for an SBA loan.  Feel free to call (toll free 1-877-436-4533) or email me (jason@jasontees.com).   If you retain me to help you with your financing needs, I’ll give you a rebate after your loan closes equal to 10% of my commission, up to $500.

SBA Loan Personal Guarantee Requirements

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Every so often, I get calls for my SBA Debt Settlement consulting business from people that claim they didn’t give a personal guarantee.  And I always tell them the same thing: “in 10 years of doing nothing but SBA loans, I’ve never seen a business owner that NOT required to provide a personal guarantee.  Bottom line: if you own the business, you are gonna have to personally guarantee the debt.

Here are some basics:

1) If you own 20% or more of the business, you are required to personally guarantee.

2) If spouses individually own less than 20%, but on a combined basis own more than 20%, each will be required to personally guarantee.

3) A lender may require an individual to personally guarantee if they are deemed to be critical to the operations of the business.  This may be particularly true if the business has a key employee that, without whom, the business could not operate effectively.  A good example would be a restaurant owner who relies on a manager with 20 years experience because the owner has limited experience.

4) A spouse who has no ownership interest in the business will be required to provide a limited guarantee if the SBA takes a lien on the home.  The guarantee will, in most cases, be limited to their interest in the home.  This requirement ensures that if a foreclosure is pursued by the bank, the non-owning spouse cannot fight it.

Ok, on to some questions:

My friend said they were not required to personally guarantee their SBA loan! So why do I have to?

Your friend is most likely wrong or they are not telling you the whole story.  In my 10 years of SBA loan consulting, I have never seen an SBA loan that didn’t have at least one personal guarantor (or if not personal guarantor, the individual owner was named as the borrower).  I’ve also never seen someone who was 100% owner not be required to personal guarantee.

Is there any way to avoid a personal guarantee?

I’ve seen ownership groups comprising 4 or 5 people all whittle down their ownership to less than 20%.  As a result the bank only required the guarantees of the owners who were most active and crucial to the business.  It’s important to keep in mind that the 20% requirement is a guideline.  If its clear that the ownership structure was set up for no other reason than to avoid the personal guarantee, most lenders will end up asking for it.

Should I personally guarantee my friend or family members SBA loan?

If you do, you need to understand the consequences of personally guaranteeing an SBA loan.  If the business fails, the bank will look to personal guarantors to repay the debt.  As a general rule of thumb, the stronger the financial position of the guarantor, the more likely that the bank will come after them.  I get calls all the time from people who say something to the effect of “it’s not fair, I had nothing to do with the business!” or “I never even made any money, I just did my friend/child/sibling a favor”.  You need to understand that when you pledge your personal guarantee, the bank doesn’t care WHY you gave the personal guarantee.  They also don’t care whether you were involved in the business, or if you make any money from the business.  My advice: think long and hard about offering your personal guarantee, especially when you have no control over the business.

Jason Milleisen can answer your questions about applying and being approved for an SBA loan.  Feel free to call (toll free 1-877-436-4533) or email me (jason@jasontees.com).   If you retain me to help you with your financing needs, I’ll give you a rebate after your loan closes equal to 10% of my commission, up to $500.

How Do Banks Evaluate SBA Loan 7a Applications?

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The evaluation process of an SBA 7a loan can seem mysterious.  Almost like a lottery where some win, and some don’t.  That’s what it seems like, but there actually is a method to the madness.  Quite simply, the SBA wants its lending partners to make “good loans” that have a high probability of being repaid.  So what do factors do lenders look at when evaluating SBA 7a loan applications?

  1.  Credit – Lenders usually want a credit score over 650 at the minimum, and 700 is preferred.  In my time as a underwriter and lender, I saw lots of people with bad credit.  The majority of the bad credit scores were rightly earned.  By that I mean that they had missed payments, or worse, failed to repay debt.  Some simply had too much debt with lots of inquiries (which we interpreted as a sign of possible desperation).  The only cases of bad credit where we might make an exception were those with extenuating circumstances, such as medical debt.  Overall, lenders do believe that is you’ve failed to repay debt in the past, it’s much more likely to happen again in the future.
  2. Collateral – While the SBA doesn’t require debt to be 100% secured, having collateral to offer (usually in the form of cash, equipment, or real estate) can help what could otherwise be considered a borderline applicant (marginal credit or cash flow, or questionable qualifications).  The best feature of SBA 7a loans is that they can be granted without sufficient collateral, which is what makes 7a loans so popular.
  3. Cash Flow – Cash Flow is the hardest aspect to grasp when it comes to underwriting an SBA 7a loan (or really any small business loan, for that matter).  While the SBA has specific guidelines for cash flow coverage ratio (defined as operating cash flow divided by debt service), the truth is that depending on who is doing the calculation, that number will vary.  The reason for this is that there are some items that can be added or subtracted from cash flow, and sometimes underwriters will disagree on what those numbers are. For example, it is common to include an “owners draw”, which represents the amount that an owner would need to take from their business in order to pay their personal bills.  Some underwriters will be very conservative about that number, assuming that a business owner will need a higher draw, while others will assume that a business owner only need to draw funds to pay debt listed on the credit report.  The difference between those numbers can be huge, which you consider school expenses, home maintenance, auto maintenance, clothing, meals etc.  So, while the SBA wants to see a debt service ratio of 1.15x (1.00x for global cash flow) for loans over $350K, as I’ve noted above, these numbers can be “massaged” depending on the underwriter or standards set by the lender.  Loans under $350K don’t have a specific debt service coverage requirement, but instead rely on a scoring system called the FICO Small Business Scoring Service.  This score is similar to a personal FICO score, except it also evaluates the business as well.
  4. Management ExperienceIf you’ve been running your business successfully for a number of years, this won’t be an issue for banks.  For startups, however, banks and the SBA want to know that if they approve you for an SBA 7a loan, that you have the skills and experience required to run the business.  An example of a strong candidate would be someone who has managed a franchise restaurant for 5 years, and is not going to open their own.  They know the business inside and out, giving the bank confidence that the loan will be repaid.  An example of a weak candidate would be an accountant deciding that he wants to open a franchise restaurant.  While he would be adept at the book keeping side, a lender may be concerned that an accountant doesn’t know all that is involved with a running a successful restaurant.
  5. Capital – This is not paramount for SBA loans, since most only require 10% down, and many cases people even borrow it.  There are all sorts of rules for “injection”, but banks eager to make SBA loans tend to find a way to get it done.

Jason Milleisen can answer your questions about applying and being approved for an SBA loan.  Feel free to call (toll free 1-877-436-4533) or email me (jason@jasontees.com).   If you retain me to help you with your financing needs, I’ll give you a rebate after your loan closes equal to 10% of my commission, up to $500.

Where do I apply for an SBA Loan?

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Ok, first things first.  The SBA does NOT make direct loans when it comes to SBA 7a loans.  (Note: They do make direct loans called disaster loans, but those are not for the same purposes as most 7a loans).  The SBA, in an effort to get lenders to lend to small businesses, simply guarantees repayment of a portion of the loan to the lender.  For example, if a borrower wants to borrow $200,000 from Super Bank to open a “Seriously, Another Yogurt Shop?” franchise but doesn’t have any collateral, Super Bank will usually turn them down because if the business fails, there will be no way to get their money back.  This is where the SBA comes in.  They offer Super Bank a deal.  If they are willing to underwrite, document, and fund the loan, the SBA will reimburse them for 75% of the loan amount if the Yogurt Franchise fails.  Here is a really important distinction that I need to make here.  The guarantee reimburses the bank but has no impact on the amount owed by the borrower.  I’m going bold and underline that last part: the SBA guarantee has no impact on the amount owed by the borrower.  If you borrow the money, there is no bailout for you, the borrower.

Now that that part is out of the way, let’s talk about where to get an SBA loan.  It’s not hard to find SBA lenders.  There are tons of them just google it.  If you do take an SBA loan, you should consider taking a loan from a Preferred SBA Lender.  While many banks tout this as the big reason to take an SBA loan from them, the truth is that there are hundreds of Preferred SBA Lenders out there, so that alone isn’t a reason to borrow from them.  With that said, being an SBA preferred lender does mean that the bank can many many decision on their own, which speeds up the underwriting and closing process.  It doesn’t guarantee an approval or anything like that.  It simply makes the process easier.  Like I said earlier, there are tons of preferred SBA lenders out there, so when choosing an SBA lender for a client, I always want the following characteristics to exist:

1) No points upfront  Unless you are in an industry that is tough to lender to, like gas stations, most lenders can pretty much all offer the same products in the same amount of time.  I find claims of faster approvals and closings to be nothing more than marketing gimmicks.  First and foremost, banks want to protect their money, which means thorough due diligence will always come ahead a speed.  Nothing is more annoying than paying good money for faster service, only to find out that you could have gotten the same thing for free.

2) Lots of SBA Lending Experience – Just because a lender is a Preferred SBA lender, it doesn’t necessarily mean that they make a lot of SBA loans.  My lenders are generally in the top 15 every year of top SBA 7a lenders in the nation.  It means that they have the personnel and processes in place that other lenders don’t.  If a bank does 95% non-SBA loans, do you think they will be more or less adept at the process?  Of course, it’s usually the latter.

3) Fair Workout Process – This is an obscure criteria that no other commercial loan broker will mention.  SBA loan, by definition, are loans that banks want to give unless the SBA is willing to guarantee a large portion.  Since my other consulting businesses exclusively focuses on SBA workouts and Settlements, I’ve with with hundreds of clients and their banks on settlements, so I know of some lenders that are good to work with, and others to avoid like the plague.

Jason Milleisen can answer your questions about applying and being approved for an SBA loan.  Feel free to call (toll free 1-877-436-4533) or email me (jason@jasontees.com).   If you retain me to help you with your financing needs, I’ll give you a rebate after your loan closes equal to 10% of my commission, up to $500.

Can I get an SBA 7a Loan For A Startup?

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So you want to start a business from scratch? I have good news and bad news.  While technically banks can fund a startup, in my experience, most lenders will only be interested in approving an SBA 7a loan for franchises.  Why?  The answer is pretty simple.  If they have had success with other franchisees for a particular franchise, they can better forecast how a new location with will do.  For example, if someone opens a Jason’s Sub Shop franchise, and the bank has given 50 SBA 7a loans to other franchisees, and all have been successful, they will be able to rely on the past success of other to predict the success of future Jason’s Sub Shops.

Contrast the above with a non-franchise startup, whether it be a restaurant, a retail shop, some other type of startup.  Startups have notoriously high failure rates, and in case you were unaware, banks don’t particularly enjoy losing money!  And since startups have no operating history, it’s really hard to predict how a new business is going to perform from a financial standpoint.  Some lenders can overcome this sort of situation by taking enough collateral to ensure that i your business does fail, the sale (also known as liquidation) of those assets will get them their money back.  While some lenders will approve these sorts of loans, they usually can’t be done via the SBA 7a program because the SBA makes it very clear that loans should only be made when the lender believes that the business has sufficient cash flow to repay the loan.  They even go out of their way to make it clear that a lack of cash flow cannot be overcome simply by taking an abundance of collateral.

When I was an SBA loan underwriter, our salespeople would try to form relationships with certain franchises were fast growing, and had a track record of success.  Franchises would often come to our offices to meet with management in hopes of convincing the head honchos that their franchise was worthy.  It’s a little known part of the franchise model, but franchises cultivating lender relationships is a big part of what they do.  Why?  Because if a franchise wants to grow fast and add lots of franchisees, they need to have a reliable source of financing for their franchisees.  Once a bank gets on board, it can help a brand really take off.  And the more franchisees that a bank funds with success (i.e. they repay their loans), the more they are willing to fund.

On the flip side, a struggling franchise can really hurt a bank.  I remember there was one particular franchise that started failing left and right, leading the bank (or actually, the SBA since they guaranteed 75% of the loan amount) to lose a ton a money.  Eventually, the bank stopped lending to the franchise.  Considering that we must have financed 20 to 30 of them, I would imagine that losing their primary lender must have put a pretty significant dent in their growth.

So if you are planning on starting a business and want to finance it with an SBA 7a loan, know that unless you are going with a franchise, the odds of getting approval will be low.

Jason Milleisen can answer your questions about applying and being approved for an SBA loan.  Feel free to call (toll free 1-877-436-4533) or email me (jason@jasontees.com).   If you retain me to help you with your financing needs, I’ll give you a rebate after your loan closes equal to 10% of my commission, up to $500.

 

Do I have to pledge my home as collateral for an SBA loan (and other common questions)?

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Do I have to pledge my home as collateral for an SBA 7a loan?

In general, if there is a collateral shortfall, lenders are required to take a home as collateral, provided that there is at least 25% equity in the property.  Many borrowers will “conveniently” take a Home Equity loan a few months before applying for an SBA loan to avoid pledging their home.

Will I be required to pledge my personal guarantee?

If you own at least 20% of the business, then yes.  It’s also worth noting that if you and your spouse own a combined over 20%, both spouses must guarantee (unless 1 spouse owns 0%).  If your spouse is not an owner, but you are required to pledge your home, your spouse will need to sign a limited guarantee (which is limited to their interest in your home).

What is the minimum credit score for an SBA loan?

I’m not sure if the SBA puts official minimums out there, but most lenders want a minimum of 650.  Any less than that will require a good explanation as to why it’s so low.

What will happen to me if my business closes or I can’t afford my SBA loan payments?

Outcomes vary.  The worst case scenario usually involves foreclosure, getting a judgement against you, or both.  When you can’t afford to pay back the loan, the first thing the bank will want to do is sell their collateral (business assets).  The SBA generally doesn’t want banks to go after your home immediately, but will do so if there are no other alternatives.  There is the possibility of a settlement, which is called Offer In Compromise.  I’ve helped borrowers through the OIC process for years with my consulting business called Distressed Loan Advisors (www.JasonTees.com).

How long does the SBA loan approval and closing process take?

You can expect it to take anywhere from 30 to 75 days, on average.  If you are buying real estate, it usually is at the longer end of that spectrum due to appraisals.  In general, I tell clients not to get lured by lenders who promise faster closings because every deal is different, and banks always value proper due diligence and documentation over speed.

What’s the most popular SBA loan type?

7a is by far the most popular SBA loan type.  It can be used for a number of purposes including business acquisitions and real estate purposes.

How much should I expect to put down for an SBA loan?

10% equity injection is required.  This can be borrowed, but it’s subject to some very specific conditions. If the equity injection will come from any form of borrowed funds, such as a HELOC or seller financing in excess of the minimum borrower injection requirements, Lender must address the proposed repayment terms as well as any Standby or Subordination terms that will be in place.

Jason Milleisen can answer your questions about applying and being approved for an SBA loan.  Feel free to call (toll free 1-877-436-4533) or email me (jason@jasontees.com).   If you retain me to help you with your financing needs, I’ll give you a rebate after your loan closes equal to 10% of my commission, up to $500.